Risk of Buying a Florida Condominium- Association Solvency

Friday, October 2, 2009 at 10:20AM

This post discusses an important issue that anyone who wants to purchase a condominium unit in Florida must consider. The downturn in the Florida real estate market has magnified this problem.

Condominium Association Solvency.

Under the Florida Condominium Law, a lender (under a first mortgage) that acquires title to a condominium unit as a result of foreclosure is only liable for the assessments accrued during the six months immediately preceding. Keeping this in mind, let’s take a look at this scenario, one that exists in a lot of condominium projects in Florida.

A developer obtained a multi-million dollar development loan to build and sell his condominium project. After much of the project was built, but before most of the units were sold, the real estate market crashed. At this time unit purchasers had closed on 20% of the total units, leaving 80% unsold and unoccupied. Because of his inability to sell the remaining units and to make the payments under the loan, the developer went bankrupt and abandoned the project. The lender was in no hurry to begin foreclosure proceedings on the unsold units for 2 reasons: (1) If it acquired title to the units, it would have to start paying the condominium assessments for all of those units, (2) Since there was no market for the units, it is likely that the lender would own the units for a substantial period of time, all the while being liable for the assessments.

It was easier and less expensive for the lender to hold off on the foreclosure until the market improved. In the meantime, the association and the unit owners (remember only 20% of the units had sold) did not have enough income through assessments to pay the common expenses of the condominium. This meant that common area utilities, maintenance, security and, most importantly, insurance could not be properly funded. If the foreclosure sale did not occur for 2 years, then the association would not receive assessments from 80% of the units for 18 months. This would put an incredible burden on the existing unit owners.

If you are looking to purchase a condominium, it is important that you find out the ownership and occupancy rate of the project. Many of these problems are concentrated in the new projects. Older, more established condominium communities generally have a more stable ownership structure, although there are defaults on mortgages for individual units out there also.

Even though you may be able to acquire a condominium unit at an exceptional bargain, you should investigate this situation and then assess the risk of your purchase.

Visit the link below for an article from the Palm Beach Post that illustrates this issue: